March 29, 2024

Federal Judge Halts Legal Challenges in Detroit Bankruptcy Case

The decision by Judge Steven Rhodes of the United States Bankruptcy Court freezes all litigation against the city, its emergency manager and Gov. Rick Snyder of Michigan during Detroit’s bankruptcy process.

Judge Rhodes said challenges to the city’s Chapter 9 filing, including protests by retired city employees about potential pension cuts, would be addressed in coming hearings. The federal bankruptcy court has “exclusive jurisdiction” over the case, he said.

It was a dramatic beginning to the largest municipal bankruptcy case in American history. As protesters circled the courthouse downtown, the judge heard arguments about whether Mr. Snyder had overstepped his authority in forcing the city into bankruptcy.

He was attempting to resolve a legal muddle that began almost immediately after Detroit filed for bankruptcy last Thursday.

The next day, Judge Rosemarie Aquilina of Ingham County Circuit Court ruled that the filing violated the Michigan Constitution, which protects the pensions of retired public employees. The city, led by the state-appointed emergency financial manager, Kevyn D. Orr, is expected to seek reductions in pensions in bankruptcy as part of its broader efforts to reduce Detroit’s estimated $18 billion in debt.

Judge Aquilina’s ruling was appealed by the state attorney general to the Michigan Court of Appeals, which on Tuesday issued a stay of her order pending an appellate decision.

But on Wednesday, in the first hearing in the case, Judge Rhodes settled the matter by approving a motion by Mr. Orr to freeze all litigation against the city during its bankruptcy. The judge said that concentrating all legal issues in federal court increased the chances that Detroit could reorganize its debts and emerge from bankruptcy in better financial shape.

“My orders enhance the likelihood of Chapter 9 reorganization, speeds the bankruptcy case and cuts costs to taxpayers,” he said.

The judge also extended protection from litigation to Mr. Orr, Governor Snyder and other state officials directly involved in the bankruptcy.

Mr. Orr attended the court arguments, but was not present when the judge made his decision. Afterward, a spokesman for the emergency manager, William Nowling, said he was pleased with the court’s action. “This clears the way so we can proceed in an orderly fashion with bankruptcy proceedings and restructuring Detroit,” Mr. Nowling said.

Lawyers representing retired police officers, firefighters and other city employees declined to say whether they would appeal the ruling by Judge Rhodes.

Union officials gathered outside the courthouse said they expected to raise the pension issues and the constitutional questions at future hearings on whether Detroit has met all legal requirements for a bankruptcy filing.

“We are going to fight this all the way,” said Edward McNeil, an official with the American Federation of State, County and Municipal Employees. “We don’t believe the city should even be in bankruptcy court.”

Both Mr. Snyder and Mr. Orr have said that a bankruptcy filing was the only option to reverse Detroit’s long decline, improve city services and settle its crushing debt load. But city workers, retirees, bondholders and other creditors have accused Mr. Orr of failing to negotiate deals on outstanding debts that could have averted the filing.

Judge Rhodes made it clear on Wednesday that he had not ruled on whether the filing violated the state’s Constitution, or whether pensions should be protected.

“All of the issues in which the court is not ruling are fully preserved,” he said.

Those issues and others will be part of what is likely to be a protracted legal battle over the city’s eligibility to file for bankruptcy. Hearings will begin later this summer, and will include testimony by Mr. Orr on the dismal condition of Detroit’s finances.

Mr. Nowling said the eligibility hearings were the first critical step in Mr. Orr’s road map for the city’s recovery. “One thing that was clear was that Judge Rhodes wanted an efficient and speedy process, and we think that’s essential for turning the city around,” he said.

The bankruptcy filing has riveted the attention of the city and surrounding region, and spurred a small but loud group of protesters to form outside the courthouse on Wednesday.

About two dozen men in red T-shirts representing the Detroit Fire Department chanted “Help us help you” as they marched down Lafayette Boulevard.

Darryl Brown, a firefighter who went on disability last year, criticized Mr. Snyder and other state officials for targeting retiree pensions. “They can’t touch it; it’s protected by the Constitution,” Mr. Brown said. “But they’re still doing everything they can to figure out how to get at it.”

A Detroit police officer, Rodney Fresh, said he feared the bankruptcy would gut what was left of the city’s dwindling middle-class population.

He accused Mr. Snyder of failing to consider the hardship the bankruptcy would cause retirees. “I want him to look at the situation and just be fair,” Mr. Fresh said. “He’s looking at everything from his point of view.”

Mary M. Chapman contributed reporting.

Article source: http://www.nytimes.com/2013/07/25/us/judge-clears-path-for-detroit-bankruptcy-case.html?partner=rss&emc=rss

Michigan Judge Rules Against Bankruptcy Push

A judge in Ingham County, home to Michigan’s capital, Lansing, ruled that Mr. Snyder’s action had violated the state Constitution because it could cut the pension benefits of retired public employees. The judge, Rosemarie Aquilina, said pensions were protected under state law, and issued an order that the bankruptcy filing be withdrawn.

Her ruling was immediately challenged by Michigan’s attorney general, who appealed to the state’s Court of Appeals on the grounds that the Chapter 9 bankruptcy filing stayed all legal proceedings related to Detroit’s debt obligations.

While the ruling may be overturned, it underscored the mounting tension in the city and the legal battles ahead as bondholders, retirees and other creditors attempt to recover money owed them by the city.

Mr. Snyder and Detroit’s emergency manager, Kevyn D. Orr, estimate the city’s debt and other long-term obligations at $18 billion.

After weeks of mostly unsuccessful negotiations with creditors to settle debts, Mr. Orr recommended a bankruptcy filing to Mr. Snyder this week. The city then filed for Chapter 9 on Thursday, minutes before Judge Aquilina was to hold a hearing on the employee pension funds’ constitutional challenge to a potential bankruptcy proceeding.

The president of one public employees’ union hailed the judge’s decision on Friday. “There is too much at stake to play political games with the hard-earned retirement security of Detroit’s public workers,” said Lee Saunders, head of the American Federation of State, County and Municipal Employees union.

But at a joint news conference on Friday, Mr. Snyder and Mr. Orr were resolute on the need for a bankruptcy filing.

Mr. Snyder, a Republican who has pushed a pro-business agenda in the state, said Detroit had no other options to deal with its debts and improve city services ranked among the nation’s worst.

“This is the time to say enough is enough in terms of the downward decline of the city of Detroit,” he said.

Now that the city has filed, Mr. Snyder and Mr. Orr said they wanted to reassure Detroit’s 700,000 residents that police, fire and other essential services will continue to function.

Mr. Orr, who was appointed by the governor, predicted that residents might start to see improvements soon, saying that the bankruptcy filing offers “breathing room” and will allow Detroit to use its limited resources to put more police cars and ambulances into service.

Depending on the outcome of the appeal of Judge Aquilina’s order, the initial bankruptcy hearings could begin as soon as next week.

On Friday, Judge Steven W. Rhodes was picked to oversee the case. Mr. Rhodes is a hometown selection, having served for 28 years as a bankruptcy judge in the Eastern District of Michigan.

The initial stages of the case will consist of Mr. Orr and possibly state officials showing that there was no available remedy for Detroit’s troubles other than bankruptcy.

“We didn’t make this decision in haste,” Mr. Orr said. “This is a decision that has been winding its way through the city for the better part of six decades.”

Employee unions and creditors may argue otherwise — either by challenging the size of Detroit’s debt, or Mr. Orr’s assertions that he bargained in good faith to reach out-of-court settlements with bondholders, retirees and others.

Some labor unions had accused Mr. Orr of using bankruptcy as a threat during negotiating sessions.

Mr. Orr said that despite marathon talks with creditors, there was little or no movement toward settlements.

“We are finally at a point where we simply can’t kick this can down the road any further,” he said.

There is no blueprint for Detroit’s recovery at this point. In the short term, Mr. Orr said that a deal with two secured creditors, Bank of America and UBS, to accept 75 cents on the dollar for $340 million in liabilities would free up casino revenues that could be used for city services.

The arrangement would provide the city with about $11 million a month in casino receipts. That cash is critical to keep the city safe and functional during a drawn-out bankruptcy process.

Mr. Orr said he expected Detroit to emerge from bankruptcy before his term as emergency manager ends in 14 months.

For Mr. Snyder, placing the state’s largest city in bankruptcy is a calculated risk that its decline could be reversed under court supervision.

He said that he did not anticipate any direct state or federal money would be needed in the effort, but that government grants to help remove abandoned buildings and improve Detroit’s infrastructure would be essential to the city’s comeback.

Article source: http://www.nytimes.com/2013/07/20/us/breadth-of-bankruptcy-fight-detroit-faces-becoming-clear.html?partner=rss&emc=rss